Analysts Fear Blasts Will Spark Recession

September 12, 2001|By Antonio Fins Business Writer

Tuesday's shocking attack not only toppled a landmark on the most famous financial skyline in the world, it may well tilt the teetering American economy into a recession, economists and other analysts said.

The deadly blasts struck at a time when Wall Street's stock markets were in turmoil, and just over a month after the latest reading of the gross domestic product gauged the U.S. economy at near zero growth. There is also concern that the horrific actions will further spook consumers, whose spending accounts for more than two-thirds of the economy.

Analysts hoped that the economy would swing up late this year. Now they worry that's unlikely to happen.

"We have certified for all practical purposes a recession as a result of this with the market being as fragile as it is," said Stanley Nabi, a managing director at Credit Suisse Asset Management, which oversees about $110 billion.

Aside from the loss of time and work due to the paralyzing shutdown of commerce, Littman worries that consumer spending, which accounts for the bulk of economic growth, will slow as Americans pull back on entertainment and other leisure expenditures. Companies, too, may also further curtail their investment in business equipment.

"It's bad. It reduces growth to zero or to negative this quarter ," said David Littman, economist at Comerica Bank in Detroit. "It doesn't look like we'll see growth this quarter or next."

Bullish forecasts get reined in

Just last week, Littmann's bullish forecast was for GDP growth of 3.5 percent next year. The only thing that could stop a robust recovery, he said at the time, was "U.S. military involvement in global hot spots or an unexpected surge in energy prices."

Both those possibilities may come to pass.

President Bush promised full retaliation by U.S. authorities, including the military, for the attacks Tuesday.

"The fear factor is immense," said Shelley Mansfield, energy manager at ADM Investor Services International in London. "What the market is worried about is the escalation of Middle East tensions and the U.S. backing of Israel."

Crude oil in London surged after hijacked aircraft plunged into targets in New York and Washington, raising concern that supplies might be disrupted if the blame were put on terrorists in the Middle East, the source of close to a third of the world's oil supply.

One price gauge, Brent crude oil for October settlement, rose $1.61, or 5.9 percent, to $29.06 a barrel on the International Petroleum Exchange, the highest closing price for a contract closest to expiration since June 14. Prices rose as much as $3.60, or 13 percent, to $31.05 a barrel during the session.

The Organization of Petroleum Exporting Countries issued a statement saying it was committed to ensuring a stable oil market and would not use oil as a "weapon."

`Oil prices already are rising'

Other analysts said they are still concerned.

"Early reports today show that oil prices already are rising," said Alicia Diaz, vice president at economic consulting firm Strategic Information Analysis Inc. in Coral Gables. "And everything seems to point to the Middle East in this attack, so how will Arab nations react if the United States decides to retaliate?"

Diaz also said the attack will lead to other longer-term costs. For example, airports may need to upgrade security systems to prevent attacks in the future. "They're going to rely more on technology for security, and that's going to increase their costs," she said. "That means the price of air travel will go up, too."

U.S. stock exchanges were closed Tuesday and will remain closed today. But other markets were not and they reflected a palpable sense of concern.

Stocks in Europe screeched more than 5 percent lower following the tragedy. London's FTSE 100 index shed 5.7 percent in its biggest one-day fall since the crash of October 1987, wiping $98 billion off the value of shares.

Latin American financial markets plummeted before coming to a halt Tuesday after investors bailed out of stocks and currencies following a wave of suspected terrorist attacks on the United States.

The region's three largest stock markets, in Brazil, Mexico and Argentina, all plunged before suspending trading.

Gold, oil and the Swiss franc rose sharply on world markets as investors sought safe investments in the turbulence.

"Panic, without a doubt, and complete and total uncertainty as to what the economic consequences to this will be," said Aloisio Lemos, an investment consultant with Lopes Filho & Associados in Rio de Janeiro.

Business Writer Doreen Hemlock contributed to this story, which was supplemented with information from wire services.